4. the impact of automation on the nigerian stock exchange.doc

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©Department of Banking and FinanceUniversity of Ado-Ekiti, 2000

Pu!is"ed for Department of Banking and FinanceUniversity of Ado-Ekiti# yFort"rig"t Educationa! Pu!is"ers$A Division of Fort"rig"t %onsu!t &imited'(, )a*aro +treet, nike, aa#c.o P## Bo/ 11Uni!ag P##, Akoka 34E53A#

The Nigerian Journal of Banking and Financial Issues 6$7BF3' provides auni8ue forum for t"e articu!ation and dissemination of app!ied researc" yacademics and professiona!s in t"e fie!d of Banking and Finance or re!ateddiscip!ines# 3t is i-annua! *ourna! pu!is"ed y t"e Department of Banking andFinance University of Ado-Ekiti, igeria#

9"e 7ourna! contains ana!ysis of anking and financia! issues re!evant to t"e igerian economic e/perience and financia! po!icies# pinions e/pressed "ereinare t"ose of t"e aut"ors and not necessari!y t"ose of t"e Department of Bankingand Finance or Fort"rig"t %onsu!t &imited#

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Printed in Nigeria by Forthright Educational Publishers, Lagos.



Nigerian Journal of Banking and Financial Issues !ol " No. #.$#%#&&

THE IMPACT OF AUTOMATION ON THE NIGERIAN

STOCK EXCHANGE

7ackson # !u*ide@

Introduction

9"e igerian +tock E/c"ange6 "as made strong strides in t"e !astdecade as a resu!t of key financia! reform decisions taken in t"e !ast fe yearsand t"e increasing!y positive steps toards good governance# Furt"ermore, someinfrastructure continues to e !aid for favoura!e operation of t"e stock e/c"angenation-ide# 9"ese efforts and successes to date "ave, a!ready egun to

demonstrate t"at dividends are paya!e from system ide reduction of financia!repression, remova! of financia! asp"y/iation and from t"e e/ercise of financia!and fisca! discip!ines in t"e management of t"e country6s economy andresources##

As a resu!t of t"e reforms of t"e !ast fe years, t"e igerian +tock E/c"ange "as no dout ac"ieved remarka!e grot" it"in t"e !ast to decadesof its e/istence, t"ere "as a!so een enormous e/pansion "i its operations interms of ider operationa! coverage# 9"ese deve!opments "ave increasedsustantia!!y t"e vo!ume of transactions and range of services offered to t"e pu!ic# 3n addition, t"e +tock E/c"ange in concert it" ot"er faci!itatinginstitutions provide emp!oyment opportunities for igerians as e!! asencouraging t"e ac8uisition of kno!edge, ski!! and professiona!ism in stock rokerage# 9"e +tock E/c"ange t"erefore represents a verita!e ve"ic!e +o t"e

continued operation and attraction of foreign capita! for !ife nation deve!opment#But in spite of t"e string of aforementioned ac"ievements, t"ere is t"e

genera! fee!ing t"at t"e igerian +tock E/c"ange is sti!! underdeve!opedt"erefore not yet Cin a position-to contriute effective!y to t"e deve!opmentneeds of t"e economy# 9"e underdeve!oped nature of t"e +tock E/c"ange isref!ected in its system of trading# 9"e igerian +tock E/c"ange operated t"eCca!!-coverC system of trading from inception to :: due to t"e paucity of securities dea!t in# and t"e comparative!y sma!! sie of t"e market#

3n t"is ca!!-over system, securities are ca!!ed individua!!y and memers$stock rokers' indicate interest "et"er to uy or se!!#

During t"e ca!!-over-days of trading, it took investors an average of si/mont"s to get s"are certificates from 5egistrars to 8uoted companies# 9"issituation "as made it possi!e for an investor to ma/imise possi!e opportunitiesin t"e market arising from price f!uctuations#

Dr# 7ackson # !u*ide is of t"e Dept of Business Administration# University of !!orin#



Automation and the Nigerian 'tock ()change $*

oever, in Apri! :: a ne trading system ca!!ed t"e %entra!+ecurities %!earing +ystem $%+%+' as introduced# 9"is system makes it possi!e for an investor to dea! on securities oug"t five days after t"etransaction day $i#e#, 9 G > H transaction day p!us five days'# 9"us t"isautomated trading system "ic" makes it imperative for t"e %+%+ to c!ear andsett!e a!! transactions on t"e stock e/c"ange it"in 9G> days "as e!iminated a!!manua! processes of trading on t"e e/c"ange#

9"e manua! system of trading causes a !ot of de!ay in t"e issuance of s"are certificates y company 5egistrars to investors conse8uent on a secondarymarket transaction# 9"erefore, most igerian investors are o!iged to e contentit" dividend payment and onus issues rat"er t"an earning more income from price f!uctuations#

9"e situation "as !ed to a very !o vo!ume of trade over t"e years asreported y t"e igerian +tock E/c"ange in its fact ook :::# 9"is is aconse8uence of t"e manua! c!earing system# t"er draacks of t"e manua!trading system inc!udeI- de!ay in issuing s"are certificates to s"are"o!ders- cance!!ation of s"are certificates of se!!ing s"are"o!ders and issuance of

ne s"are certificates for a uying s"are"o!der per transaction#- %onstant signature verification efore sa!es is a!!oed#- Dea!ing memers ere s"ort-se!!ing- Fai!ed transaction- &oss of s"are certificates, and so on#

From t"e foregoing t"erefore, t"is study is designed to e/amine titimpact of automation on t"e vo!ume of trading on t"e igerian +tock

E/c"anges6 +pecifica!!y, t"e study intends to ac"ieve t"e fo!!oing o*ectives<$a' 9o determine t"e average annua! vo!ume of s"ares traded on t"e

igerian +tock E/c"ange during t"e ca!!-over system of trading#$' 9o determine t"e average annua! vo!ume of s"ares traded on t"e

igerian +tock E/c"ange after t"e introduction of %+%+#$c' From $a' and $' aove, to determine t"e impact of automatic on t"e

traded vo!ume of s"ares on t"e igerian +tock E/c"ange#

Institutional fram!or"

T# Cntral Scuritis Clarin$ S%stm

9"e !ast decade sa monumenta! c"anges in economic environment prope!!ed y ma*or tec"no!ogica! innovations in te!ecommunications andinformation tec"no!ogy resu!ting in integrated or!d financia! markets it" t"eemergence of g!oa!isation or cross-order investments# 3n :;;# t"e Federationof 3nternationa! +tock E/c"ange $F3BE' of "ic" t"e igeria +tock E/c"ange isa memer, commission a group of t"irty $4 =0' e/perts to undertake a study of or!d stock markets# 9"e nine $:'



Nigerian Journal of Banking and Financial Issues $"

key recommendations of t"e 4-=0 "ave ecome g!oa! stock market yard stick for c!earing, sett!ement, depository, registry and custodian systems#

3n vie of t"e foregoing, t"e igerian +tock E/c"ange on 7u!y 2:,::2 incorporated a susidiary company ca!!ed %entra! +ecurities %!earing+ystem &imited it" a mission to speed up t"e de!ivery system of t"e igerian%apita! )arket t"roug" t"e introduction of efficient, effective securities,c!earing, sett!ement and custodian mec"anisms it" minimum risk#

9"is as to e ac"ieved y t"e imp!ementation of t"e +tock E/c"ange)anagement +ystem $+E)+' softare app!ication package# 9"e +E)+ is a four $(' modu!e package<J %!earing.+ett!ement< Depository.registry $%D+' system< %ustodian services

J Board and automated trading and market contro! and survei!!anceJ Broker management and !icensing and stockrokers anksJ %orporate profi!e management and statistics inc!uding 3DEK#9"e %entra! +ecurities %!earing +ystems &imited as commissioned on Apri! ;:: and commenced operations on Apri! ( ::#

9"e %+%+, in addition to c!earing and sett!ing trades, functions as<- %entra! depository for s"are certificates of companies 8uoted on t"e

igerian +tock E/c"ange#- +u-registry for a!! 8uoted securities $in con*unction it" registrars of

8uoted companies'#- 3ssuer of centra! securities identification numers to stock "o!ders- %ustodian $in con*unction it" memers' for !oca! and foreign instruments#

9"e system operates a 9 G > sett!ement cyc!e for transaction on t"ee/c"ange, in conformity it" t"e F3BE standard for emerging market to "ic" igerian +tock E/c"ange market e!ongs# 9"e 9 G > $transaction p!us five days'sett!ement cyc!e is faci!itated y t"e immoi!isation of s"are certificates in acentra! !ocation "ic" in turn ena!es transaction to e processed in ane!ectronic ook entry form#

9"us, p"ysica! de!ivery of s"are certificates for secondary markettransactions to fu!fi!! sett!ement o!igations "as een rep!aced y e!ectroniccredits and deits to s"are"o!ders stock positions#

Benefits of t"e %+%+ inc!ude among ot"ers<- 5eduction in incidence of !oss or sto!en s"are certificates- E!imination of !ate de!ivery of s"are certificates- 5eduction in t"e cost of maintaining register of s"are "o!ders- 3ncreased !i8uidity of stock

- 3ncreased transparency of market- 3ncreased market turnover - Encourages foreign investments- Ensures prompt inter-roker money and stock sett!ements



Automation and the Nigerian 'tock ()change $+

- 3ncreased efficiency and profitai!ity of stockroking firms- 5eduction of operating costs#

9o ma/imise t"e gain of t"e %entra! +ecurities %!earing +ystems &imited,t"e ca!!-over trading system as in Apri! ::: rep!aced it" t"e automatedtrading system it" ids and offers of securities noLv matc"ed y stockrokerson# t"e trading f!oors of t"e +tock E/c"ange #t"roug" a netork of computers#

+econdary market transactions are no consummated y stock rokerst"roug" t"e use of computers it"in t"e "ours of #00a#m# ti!! a!! ids andoffers "ave een e/ecuted $aout #=0p#m# on t"e average'#

Rsarc# mt#odolo$%

9"e igerian +tock E/c"ange is not t"e on!y institution in t"e capita!market, ut it is t"e on!y capita! market institution in "ic" ot" t"e# centra!securities c!earing systems !imited $%+%+' and Automated 9rading +ystem$A9+' are re!evant, eing t"e on!y market in "ic" transactions on 8uotedsecurities are perfected# 3t t"en Jfits in perfect!y into t"e o*ectives of t"is study#And t"erefore, represents t"e study samp!e#

9"e main source of data for t"e study is t"e secondary source#3nformation as otained from ot" interna! pu!ications of t"e igerian +tock E/c"ange, suc" as<

- t"e igerian +tock E/c"ange Factooks- t"e dai!y officia! !ist of t"e igerian +tock E/c"ange< and a!so

from e/terna! sources suc" as- Pu!ications y t"e centra! securities c!earing system !imited#Data otained ere ana!ysed y t"e use of simp!e percentages in order to

"ig"!ig"t trends and summarise resu!tI

9"e parameters considered in t"is ana!ysis inc!ude<- )arket capita!iation- umer of s"ares traded- Dai!y average vo!ume- umer of stock roking firms- umer of !isted companies- umer of !isted securities

&ata anal%sis and discussion of rsults

9"e resu!ts of our data ana!ysis ased on t"e aove parameters are presented asfo!!os< 6



:>

Ta'l (

Mar"t Ca)italisation

*ar Mar"t Ca)italisation + C#an$

Post A9+ ::: 2;#2 i!!ion 0Pre A9+ ::; 210#; i!!ion

9a!e s"os a pre-A9+ market capita!isation of 210#; i!!ion in ::; risingto 2;;#2 i!!ion during t"e si/ mont"s post-A9+ in :::# 9"is represents anincrease of 0M#

Ta'l ,

Prcnta$ C#an$s in Mar"t Ca)italisation

ear )arket %ap# $ Bi!!ion' M 3ncrease::; 21=#= (1:: 2:2#0 >2=::1 2;>#1 >0:::> # 21>::( 1>#> (0::= (1#: N::= as taken as t"e ase year for t"e purpose of t"is ana!ysis#

Fi$ur (- Mar"t ca)italisation .N 'illion/



:1

Ta'l 0Num'r of S#ars Tradd

ear umer of +"ares 9raded $ Bi!!ion' M 3ncrease::; 2# =(=:: #= (::1 0#;;2 ;1::> 0#=: -1::( 0#>2( 0::= 0#(= -9"e percentage increase as otained using ::= as t"e ase year#

Fi$ur ,- Num'r of S#ars .in 'illions/

3t is evident from 9a!e = t"at t"e vo!ume of s"ares traded increasedsustantia!!y in ::1 fo!!oing t"e de-regu!ation of t"e market and muc" morein :: after t"e introduction of t"e %entra! +ecurities %!earing +ystem#

9"e study a!so considered t"e tota! numer of s"ares traded on t"ee/c"ange in t"e "a!f-year period $7anuary - 7une' ::; and :::

Ta'l 1

Prcnta$ C#an$s in Num'r of S#ars Tradd

.2ear $7an-7un' o# of +"ares 9raded $)i!!ion' Percentage %"angePost A9+ ::: :1>#: =0Pre A9+ ::; =;#= --



Nigerian Journal of Banking and Financial Issues $

9urnover on t"e e/c"ange during t"e si/ mont"s ended 7une ::: stoodat :1>#: mi!!ion s"ares, up y =0M due to t"e successfu! transition to t"eAutomated 9rading +ystem $A9+'#

9a!e >ear D#A#O# )i!!ion M 3ncrease::; ;#( =(2:: >#= :::1 =#> ;(::> #1 1::( 2# 1::= #: -

Fi$ur 0- &ail% A2ra$ 3olum

9a!e > s"os t"at t"ere as a significant increase in t"e averagenumer of s"ares traded on t"e f!oors of t"e e/c"ange in :: and ::;fo!!oing t"e deregu!ation of t"e market and introduction of t"e %entra!+ecurities +ystems &imited# 9"e pre-%+%+ rate of increase ranges from 0M to;(M eteen ::= and ::1 "i!e for t"e post %+%+ years it as eteen:M and =(2M in ::;#

Ta'l 4

Num'r of Stoc" 'ro"in$ Firms

*ar No5 of Stoc" 'ro"in$ Firms + Incras

::; 221 1:: 2 >>::1 12 >::> 12 >::( (0 0::= (0 -



Automation and the Nigerian 'tock ()change $-

::= ::( ::> ::1 :: ::; ears

Fi$ur 1- Num'r of Stoc" 6ro"in$ Firms

9a!e 1 s"os an improvement of eteen >>M and 1M in t"enumer of stockroking firms invo!ved in dai!y market transactions on t"e f!oorsof t"e igerian +tock E/c"ange in :: and ::; respective!y se8ue! toautomation introduced in ::#

Ta'l 7

Num'r of 8istd Com)anis

ear o# of &isted %ompanies M 3ncrease::; ;1 1#

:: ;2 (#1::1 ;= >#::> ; (#0::( #::= ( -

::= ::( ::> ::1 :: ::; earsFi$ur 9- Num'r of 8istd Com)anis

)5# AE,D5A %)P&E9E

45AP



Nigerian Journal of Banking and Financial Issues $$

9a!e s"os t"at t"ere ere no significant c"anges in t"e numer of companies !isted on t"e igerian +tock E/c"ange for t"e period under revie ot" CPre and PostC automation#

Ta'l :

Num'r of 8istd Scuritis

ear 4ovt#+tocks M %"ange 3ndustria! M %"ange E8uities

&oans M %"ange::; : -(: >: - ;1 :: 22 -( 10 -1 ;2 >

::1 2( -=> 1: -= 3>= >::> 2; -2( 1 -1 ; (::( => -> 1( -0 2::= = - - ( -

"i!st t"e numer of government stocks and industria! !oans decreased progressive!y over t"e years, !arge!y due to maturity, redemption and eventua!de-!isting, t"e numer of e8uities $ordinary s"ares' increased progressive!y due!o ne !isting of securities#

5esu!ts otained from t"e ana!ysis of data for t"is study s"o t"at t"eintroduction of automation in t"e igeria +tock )arket acted as a cata!yst to ot" t"e vo!ume of trade consumated on t"e f!oors of t"e e/c"ange from (=mi!!ion s"ares in ::= to 2# i!!ion s"ares in ::;# 3t a!so s"os an increase in

t"e numer of stockroking firms from (0 in ::= to 221 in ::;#

Conclusion

9"e introduction of t"e %+%+ and t"e A9+ "ave increased t"e tempo of trading activities on t"e igerian +tock )arket# 9"ey "ave increasedsustantia!!y t"e fo!!oing indices< market turnover, transparency< investor6sconfidence< foreign investments< !i8uidity and virancy of t"e market< and prompt inter-roker money and stock sett!ement##

3n conc!uding, t"is study ants to make t"e fo!!oingrecommendations so t"at t"e igerian +tock )arket can en*oy fu!!y t"edividends of automation# 9"ese inc!ude t"e fo!!oing<i' 9"e %+%+ and t"e A9+ s"ou!d accommodate a!! 8uoted securities# For no

on!y e8uities are traded t"roug" t"e %+%+ and A9+< ot"er securities suc" asgovernment stocks, industria! !oans, onds and preference stocks are yet to e accommodated in t"e current automation process,

ii' 9"e transaction cyc!e current!y 9 G > for sett!ement of cas" and stock s"ou!d e reduced furt"er to 9 G t"roug" t"e use of a sing!e sett!ement



Automation and the Nigerian 'tock ()change #&&

ank as opposed to severa! sett!ement anks eing used no#iii' 9"e trading "ours s"ou!d e e/tended eyond t"e present c!osing time of

#=0p#m#iv' 5emote trading "ere stock rokers ou!d e a!e to trade from t"e

conveniences of t"eir offices s"ou!d commence soonest, t"is ou!d invo!vein t"e introduction of computer netorking,

v' &icensing of stock roking firms s"ou!d e !iera!ised,vi' 9"ere s"ou!d e a separation of functions eteen *oers and dea!ers and

fina!!y t"e Federa! 4overnment of igeria s"ou!d f!oat ne deve!opmentstocks for capita! pro*ects instead of ot"er forms of orroing#9"ese recommendations, it is "oped, ou!d furt"er improve on t"e

automation process a!ready commenced t"erey en"ancing t"e capita!

moi!ising capai!ities of t"e igerian +tock E/c"ange#

Rfrnc-

Adetun*i# # $::K'# C9"e igerian %apita! )arket# 9"e 9ask Before )arketperators#C A paper presented at t"e 2nd Annua! %onference of t"e%"artered 3nstitute of +tock Brokers# &agos igeria#

-- $::'< Foreign 3nvestment pportunities# Potentia!s and 5imers in%apita! )arkets- A Paper Presented at t"e A!riean %onference of +tock Brokers< 5egistrars# 3nvestment Bankers and Fund )anagers# &agos# igeria#

A!i!e# #3# $::'< -Financing Pu!ic Pro*ect t"roug" t"e %apita! )arket#C APaper Presented at t"e 3nternationa! %onference on Promoting %apita!#)arket in Africa &agos igeria

-- $::2'< Esta!is"ing a +tock )arket< 9"e igerian E/perience# A paper presented at t"e 3nternationa! %onference on Promoting %apita!)arkets in &agos igeria

igerian +tock e/c"ange $:::'< Fact ook# igerian +tock e/c"ange $:::'< Dai!y fficia! &ist#!oe# 5#A $::;' Effective Pricing of +ecurities in t"e +econdary )arket#C

%"artered 3nstitute of +tockrokers# &agos - igeria#a!! +treet 9rade %o# &td# $:::'< %ustom +treet 5evie< A es!etter# Oo!# 3,

3ssue 2#ing# %#%# $::f,'< C+tock )arket Prices and t"e Oo!ume of +a!es#C Economic -

Africa, Cvo!ume =(#

4. the impact of automation on the nigerian stock exchange.doc

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